Statistics vary on the failure rate for startups. Startup Genome – a project coauthored by Berkeley & Stanford faculty members with Steve Blank and 10 startup accelerators as contributors – analyzed 3,200 high growth web/mobile startups and found that 92% of startups failed within 3 years. Yet, even in the face of such sobering statistics, entrepreneurs are seldom discouraged.
Starting a business requires a lot. It requires courage. It requires commitment. Some say it may even require narcissism. Whatever the requirements, entrepreneurs spend a lot of time trying to figure out how to succeed but regularly neglect the prospect of failure.
So to save the heartache and potential catastrophe, keep the following in mind when starting and running a (potentially failed) business: perspective, planning, and process.
The path of an entrepreneur can often feel more like a desert journey – desolate, lonely, and fraught with risks. In this mindset, it is easy to forget the others on the journey, some by choice and some against their will. Decisions never occur in a vacuum and the repercussions of which reverberate long past the life of a company. Thus, It is vital to consider the various perspectives throughout the life of a company, and most importantly at the end and failure of a company.
Shikhar Ghosh, professor of Founder’s Dilemma, offered a creative and thorough matrix to assess the interests of a founder and company.
Contingency planning is an often-overlooked tool for an entrepreneur. It is vital to establish boundaries and plans during good times to avoid potentially catastrophic decisions and consequences during lean times. Taking a page from Pentagon’s CONPLAN: 8888 – Counter Zombie Dominance – contingency plans often include some of the following basics:
- Conditions for implementation.
- Plan for Execution.
- Environmental effects (or effects identified from various perspectives)
- Legal Considerations
- Decisive Points / Key Events and Milestones
The basics above raise several key questions. What are the factors that trigger your contingency plan? Most importantly, what is the minimum amount of time and capital required to fail gracefully? Are there experiments that can offer insight before the end of funding (and perhaps allow you to return capital to investors)? How long do you need to responsibly wind down the company? With these questions in mind (based largely on the perspectives identified earlier), a founder can have the flexibility to responsibly wind down the company.
Above all, a contingency plan put in place before a time of dire circumstances can help a founder avoid making potentially catastrophic decisions at a time when he is likely most vulnerable to the emotional and physiological impact of failure.
My greatest takeaway from Founder’s Dilemma is that success can follow flawed execution and failure can follow flawless execution. Thus, process for a founder can be more important in preserving future financial and relationship capital. Several of the cases from the semester offer examples of successful and unsuccessful processes for winding down a company. Many help tie together the earlier points of perspective and planning for an entrepreneur.
- Weigh the reputational impact and access to investment in the future: After several failed experiments, Markus Berger, founder of DINR, decided to return unused capital to his investors. At the end of the case, we learned that one of the investors told him to come back next time he had an idea.
- Get buy-in and input from key stakeholders: Tom Leung, found of Yabbly and Anthology, consulted his investors, wife, and co-founder in deciding to pursue Anthology versus selling to Hammock. In the end, the process by which he took to make the decision was more important than the decision itself.
- Have (and execute) a plan to responsibly wind down the company: 38 Studios, Curt Schilling’s gaming venture, ended abruptly with no forewarning. Worst of all, employees – many which had recently relocated – were left with no options, no pay, and no health care. Even with a meager two-week plan to wind down the company, the employees could have made arrangements to seek employment, transition health benefits, and manage affairs.
Most importantly, process won’t guarantee success or failure. But what it will help is to salvage relationships, capital, and potential for future endeavors should your startup fail.